2014 (11) TMI 356 - HC - Income Tax

Disallowance u/s 14A r.w Rule 8D Interest expenses on dividend income Held that - The Tribunal was rightly of the view that once it was duly established that no borrowed funds on which interest was paid had been invested for earning tax free income, no disallowance was permissible u/s 14A - under Rule 8D(2)(ii), a proportionate disallowance out of interest expenditure would be made in respect of interest expenditure which is not directly attributable to any particular income or receipt - Since the entire interest expenditure was attributable to business in which the resultant income was assessable to tax, a disallowance could not be made - The Tribunal rightly deleted a disallowance partially u/s 14A, sustaining the balance of ₹ 0.96 lacs on account of other expenditure to the extent of 0.5 percent of the average value of investment Relying upon Dhampur Sugar Mills Ltd, Bijnor Vs Commissioner of Income Tax, Bareilly 2014 (9) TMI 791 - ALLAHABAD HIGH COURT Decided against revenue. Expenses incurred on transmission lines and contribution paid to the Uttar Pradesh Power Corporation Limited disallowed Capital expenses or not - Held that - In Empire Jute Co Ltd Vs Commissioner of Income Tax 1980 (5) TMI 1 - SUPREME Court it has been held that the true test is to consider the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable - the expenditure which was incurred by the assessee in the laying of transmission lines was clearly on the revenue account - Upon the erection of transmission lines, they were to vest absolutely in UPPCL - The expenditure which was incurred by the assessee was for facilitating the efficient conduct of its business since the assessee had to supply electricity to its sole consumer UPPCL - This was not an advantage of a capital nature thus, the order of the Tribunal is upheld Decided against revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.
2. Disallowance under Section 36(1)(iii) regarding interest-free loans and advances to sister concerns/subsidiaries.
3. Disallowance of expenses incurred on transmission lines and contributions paid to UPPCL under Section 37(1).
4. Computation of book profit under Section 115JB due to disallowance under Section 14A.

Issue-wise Detailed Analysis:

Re Question No 1:
The Tribunal deleted the disallowance made under Section 14A read with Rule 8D. The Assessing Officer (AO) had disallowed Rs. 67.75 lacs, attributing interest expenses to exempt dividend income. The Commissioner (Appeals) found that shares were acquired from the assessee's own funds and term loans were for specific purposes. The Tribunal confirmed that no borrowed funds were used for tax-free income, thus disallowance was not permissible. The Tribunal's view was consistent with Section 14A, which disallows deductions for expenses related to exempt income only if borrowed funds are used.

Re Question No 2:
The Tribunal referenced previous judgments for Assessment Years 2003-04, 2004-05, and 2005-06, where similar disallowances were deleted. The Tribunal followed the Division Bench's decision in Commissioner of Income Tax, Lucknow Vs Dhampur Sugar Mills Ltd and Commissioner of Income Tax, Moradabad Vs Dhampur Sugar Mills Ltd, which favored the assessee. The revenue failed to provide a distinction warranting a different view.

Re Question No 3:
The primary issue was the Rs. 8.48 crores payment to UPPCL for constructing transmission lines. The AO disallowed the expenditure, deeming it capital in nature. However, the Commissioner (Appeals) and Tribunal held it as revenue expenditure since the transmission lines were UPPCL's property, and the expenditure facilitated the assessee's business without creating an enduring benefit. The Tribunal cited Supreme Court precedents like Empire Jute Co Ltd Vs Commissioner of Income Tax and L H Sugar Factory and Oil Mills (P) Ltd Vs Commissioner of Income Tax, emphasizing that expenditures facilitating business operations without capital accretion are revenue in nature.

Re Question No 4:
This question was consequential to the first issue. Since the Tribunal found the disallowance under Section 14A unjustified, the related computation of book profit under Section 115JB was also not separately contested by the revenue.

Conclusion:
The appeal did not raise any substantial question of law, and the Tribunal's findings were upheld. The appeal was dismissed without any order as to costs.